Williams O. Woody
Millions of college students miss out on valuable financial aid every year simply because they mistakenly believe they won’t qualify for aid or they are intimidated by the process, according to financial planners.
Yet applying for financial aid can make the difference between affording the school the student wants to attend and attending the school that is affordable. Financial aid can even make the difference between leaving school or being able to stay.
A study released in October 2004 by the American Council on Education found that in the 1999-2000 school year, half of all undergraduate students enrolled at colleges that participated in the federal financial aid program didn’t bother to apply for aid. Among those who applied, some missed application deadlines, often resulting in no aid awards.
While some students would not have qualified because they had sufficient financial resources, many left money on the table. In fact, the study concluded 850,000 low-income students would have qualified for federal Pell grants, which do not have to be repaid.
The first key to overcoming myths about financial aid is understanding exactly what financial aid is. Aid is actually a mixture of loans, grants, scholarships and work-study, which requires that students work a certain number of hours at the school.
To calculate the amount of aid a student qualifies for, start by determining the total cost of attending a particular school: tuition and fees, books, room and board, transportation and miscellaneous expenses. The school then must determine how much of the total cost the student’s family can reasonably be expected to pay, which is known as the expected family contribution.
Typically, the calculation of the expected family contribution starts with completion of the Free Application for Federal Student aid. The FAFSA assesses the student and parents’ income, investments and other financial resources to determine an expected family contribution amount. Additionally, some colleges, particularly private institutions, gather additional information to see if the student qualifies for nonfederal (institutional) financial aid. Theoretically, the shortfall between what the family is expected to pay and the total cost of attending a particular institution is made up by financial aid.
Students should not assume that just because they come from a middle-income or affluent family, they won’t qualify for aid. A recent study by a Harvard professor found that 22 percent of families making $100,000 or more were receiving financial aid for a student.
Also, although a student might not qualify for aid from a lower-cost college, he might qualify for aid from a more expensive school, which may be more desirable for the student.
The majority of financial aid comes in the form of loans, which will have to be repaid. But the loans are often subsidized, which means that interest or principal on the loan don’t have to be repaid until after the student graduates or quits school. That’s a big help to cash flow. Furthermore, the student may receive work-study for 15 to 20 hours a week. Most colleges, particularly private schools, kick in grants or merit scholarships from endowment funds.
Aid packages can vary substantially among schools and even region-to-region, so they should be compared carefully – especially on the nonloan portions. Don’t consider the packages written in stone. Sometimes errors are made or important financial aid is left out. Perhaps the applicant overlooked mentioning special financial circumstances such as high medical bills, a disabled child living at home or more than one child in college.
Just because a student doesn’t qualify for aid one year doesn’t mean that the same thing will happen the next year. The school’s aid pool, or criteria or the student’s circumstances might change.
Perhaps the greatest myth about financial aid is what impact savings will have on it. How a family saves – such as a custodial account versus a 529 savings plan – will affect the expected family contribution, especially for families on the margin for aid. The Harvard study, for example, shows that saving in certain types of college investments reduces aid more than the same amount saved in a different manner. A certified financial planner can help families sort out the options that are best for particular circumstances.
The key, however, is to not skip saving for college out of fear that financial aid will be reduced. Remember, the majority of aid these days is in loans. It’s better to save in advance and earn interest than to borrow later and pay interest.
This article was produced by the Financial Planning Association and provided by William O. Woody of Stovall Woody Associates.
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